Baffling Price action stats

Conventional wisdom is (Fancy way of saying, 'I believe'), today's price action is very bearish. It's a classical Bear flag in a bear market. Downside breakdown happened yesterday and we will likely to see some follow through. Some might even say that it's a reliable chart pattern.

Let's use statistical analysis.

1. When ES closed >1% down after Gap UP open, aka Strong Reversal day, going long was more profitable the following day! Sample size- 175 days. Profit factor 1.2
(For >2% days, the results are similar but number of days less @ 44)

2. In bear markets i.e. <200 day MA, it's even more bullish @ profit factor 1.5

3. However, if the previous day's high & low were tested, like Tuesday, the profit factor is neutral @ 1.

4. Finally, If this price action happened after the market made a 5 day high in a Bear market, then PF is only 0.4 for longs. i.e Bearish. This happened only 20 times though.

So, there may be some truth to this belief but the reality is often very fuzzy and the 'edge' is not as clear-cut as we hope.

Narcissus 

Baffling Price action stats Conventional wisdom is (Fancy way of saying, 'I believe'), today's price action is very bearish. It's a classical Bear flag in a bear market. Downside breakdown happened yesterday and we will likely to see some follow through. Some might even say that it's a reliable chart pattern. Let's use statistical analysis. 1. When ES closed >1% down after Gap UP open, aka Strong Reversal day, going long was more profitable the following day! Sample size- 175 days. Profit factor 1.2 (For >2% days, the results are similar but number of days less @ 44) 2. In bear markets i.e. <200 day MA, it's even more bullish @ profit factor 1.5 3. However, if the previous day's high & low were tested, like Tuesday, the profit factor is neutral @ 1. 4. Finally, If this price action happened after the market made a 5 day high in a Bear market, then PF is only 0.4 for longs. i.e Bearish. This happened only 20 times though. So, there may be some truth to this belief but the reality is often very fuzzy and the 'edge' is not as clear-cut as we hope.

I think it would be rather odd if the market did not make a strong attempt down today.

Executed as per plan. Long 1/4 @ open.

Scaled in 1/4 below ONL but too tight stop and hence shaken out.

Scaled in 1/4 again after buyers showed up. May be slightly premature entry as ONH is still intact. Quite choppy, but expected after a trend day. If we make new LOD, then I'm out. Currently buyers struggling to keep the price above the open print. I'm cautious. No more scale-in as per instructions from the analyst. Scale out above ONH and 1/4 till EOD.

Appraisal

Overall happy with execution.

1st scale in - as per plan but too tight stop.

2nd scale in - my error. Misjudged that ONH was successfully tested.

Breakeven / small loss day.

Is window dressing real?

I studied the last 20 years. i.e 240 trading days.

Result - The last trading day of the month is bearish. Profit factor 1.25 for shorts.

However, here is the interesting part. If you look under the hood, it's actually a bullish day in a bear market & vice versa (Bearish in a bull market). Statistically it's NOT a chance finding.

To me, that IS a clear indication of window dressing. Another proof that market is NOT random.

Though I look at other factors too, this information will definitely make me think twice about shorting today. I would need to see stronger bearish stats from other factors. For instance, right now we are trading significantly lower. If we open gap down, that's bearish and this may negate the bullish window dressing effect.

Another lesson in probability for me is to look @ the historical distribution of profits and losses. The following diagram clearly shows that bullish stats will also have lots of losing trades (usually close to 50%) but the big winners are more frequent than big losers. Hence the overall result will be skewed positively. Similar to fat tail concept.

Surprised with the bullish stats.

I can reduce the size but I gotta follow the direction.

June 30 Update 1

Long 1/4 size as per plan.

Price action bearish so far with no sign of reversal.

I'm not allowed to bottom fish today. Some distribution going on around 3750 but still bearish price action. Likely losing day but I'm ok with that. End of the day closure.

This is the timeline for my execution strategy with my new system based on stats.

Stage 1 - Signal executed with no discretion - Drill completed last year.

Stage 2 - Signal executed with size discretion (if price action or other indicators are in conflict, like today) - Current drill (from April'22 Quarter)

Stage 3 - Signal NOT executed if conflict with other indicators. (July'22 Quarter)

Stage 4 - Over-riding signal and trading against it. (October'22 Quarter)

Surprised by the U turn.

I couldn't scale in after trend change as the retracements were small. My limit order was not filled.

Only 1/4 size long from open till close. I'm fine with that.

I learnt something useful about the "structure' of reversal days in terms of EMA crossover, delta pressure & relative volume. Will have more confidence in picking top or bottom in the future.

Scaling-in is harder!